As long as debt’s too high, get used to the market gyrations
So…the markets.
As I begin writing this — and the only certainty right now is that things are uncertain — the Dow is down another 2 percent and the Nasdaq 3 percent. By now, all but forgotten are the morning’s jobs numbers: a small reduction in the unemployment rate, which is either a) worse than it looks because a whole lot of people have simply given up looking for work, or b) slightly better than it looks because the job-creation number is lower than it should be due to the Minnesota government shutdown.
It is overly simplistic to attribute the steep falls Tuesday, Thursday and today to the debt-ceiling deal. Mainly because a reduction of $7 billion in federal spending (a fraction of 1 percent of gross domestic product) between now and October 2012 isn’t the reason investors are worried about another recession. And it’s not a sign that investors think Washington is overly dysfunctional right now — otherwise, they wouldn’t be rushing to buy Treasurys and pushing down yields the way they are.
Or do you really think the markets would have reacted better to higher taxes on millionaires, billionaires, oil companies and corporate jet owners? Or a “clean” debt-ceiling increase?
Besides the yields for Treasurys, I think there are two other important data points right now. They’re the yields for Italian and Spanish 10-year notes, both of which have passed and remained above the 6 percent mark during the past week. The worry is that these countries — and the big banks that hold big chunks of their debt — are heading to bailout territory, and that no one can bail them out.
To understand why, consider the relative sizes of these countries and those which have already received bailouts: Greece, Ireland and Portugal. Spain’s GDP in 2010 was $1.4 trillion, and Italy’s $2.1 trillion.
The combined GDPs of Greece, Ireland and Portugal: $738 billion. Even Belgium, which is also making some people jittery, is about the size of Ireland and Portugal combined.
Italy represents about one-eighth of the entire European Union’s economic output, and Spain about one-twelfth. Together, they surpass that of Germany, the country called upon to bail out the first three little PIIGS.
All of these countries’ debt-to-GDP ratios, with the exception of Spain, are near or above 100 percent. Spain and Italy together have public debt of more than $4 trillion. They’re simply too big to bail out, which is even worse than too big to fail.
That, and the continued sluggishness of the U.S. economy, is primarily what’s driving down equities markets. And both problems are related to the deleveraging that the governments of major industrialized nations have yet to undertake.
The good news? Since I started writing this post, the Dow has recovered so that it’s actually up 1 percent and Nasdaq just above break-even. That suggests to me that people have money to spend when they see bargains, and there surely are a few after the routs of the past week.
But stock prices are ultimately a reflection of perceived future profitability. As long as we are undergoing — or, worse, trying to delay — the needed deleveraging, there’s going to be a lot of economic fear and a lot of bouncing around by the markets yet to go.
– By Kyle Wingfield
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89 comments Add your comment
Lil' Barry Bailout (Revised Downward)
August 5th, 2011
3:54 pm
What business is it of mine to tell people what to do with their property?
independent voter
August 5th, 2011
3:57 pm
Obama does not need any help in not succeeding… its easy to tell on this blog who has never run a company.. invested their own time and money and maybe failed once or twice… worked on commission.. no salary… gov’t union workers… they are easy to spot… class warfare by Obama.. hate the fat cats…. who pays the taxes ????? we can’t all work for the gov’t… just look at the Post Office bleeding Billion$… Dept.s energy, education, and yes defense.. once a gov’t program gets started can’t get it under control
MarkV
August 5th, 2011
4:00 pm
Kyle,
I do not know what Ayn Rant exactly meant @ 3:13 regarding “cuttung the GDP,” but most economists I have heard from (not including Treasury Secretary Geithner) believe that the spending cuts will hurt the economy in the short run
the original and still the best John Galt
August 5th, 2011
4:02 pm
The “Supply” part of the equation has little to do with the “price” of gold. The supply of gold is relatively stable; even the new mines discovered in the past few years, along with highly effecient methods of extracting gold from the ground, contribute only a small percentage to the supply of gold on the market at any given time.
The “price” of gold has a little more to do with demand, since gold is a traditional hedge against inflation, so those who understand that inflation is about to go through the roof are using gold to alleviate some of the pain this will cause, by ensuring that they own hard assets.
I put the term ‘price” in quotation marks, because the expression of the number of fiat dollars it takes to buy an ounce of gold has more to do with the value or lack of value, or “purchasing power,” that the fiat dollars have.
40 years ago gold cost 35 paper dollars an ounce. Today it costs 1650 paper dollars an ounce. What has changed?
saywhat?
August 5th, 2011
4:03 pm
Kyle, spending 800 billion DID help the economy, and likely kept us out of depression.Witness the economic slowdown as the stimulus winds down. As for getting another “800 billion without paying for it”, that is not what I am proposing. 800 billion needs to raised in the form of taxes on the wealthiest indiviuals and cash-rich corporations who refuse to spend or invest it. This is not taking money out of the economy- it is forcing money INTO the economy. What they lose they will recover as history of the last 40 years definitively shows money trickles up, not down.
carlosgvv
August 5th, 2011
4:08 pm
The Government says we probably wont go into another recession. As long as unemployment stays between 9 and 10%, we are not only in one but have never gotten out.
Kyle Wingfield
August 5th, 2011
4:27 pm
MarkV: But there aren’t any cuts in the short run — at least none worth mentioning. It’s $7 billion in FY12.
Kyle Wingfield
August 5th, 2011
4:32 pm
Sorry, that $7 billion figure was from an earlier draft. It’s actually $25 billion — which is about one-sixth of 1 percent of GDP. Not even a rounding error. That’s not why everyone suddenly decided the U.S. is on the verge of a double-dip.
marko
August 5th, 2011
4:36 pm
In 1914 henry Ford started paying his workers five bucks a day. A princely sum at the time. Henry reasoned that if he was to sell cars people would need to make enough money to afford them. Today Wal-Mart employees are paid enough to by the Chinese junk they sell. if they don’t mind living in trailers. The problem would seem to be that job creators (Republican for rich people) don’t seem inclined to create any jobs. Apart from having lots of money, rich people are pretty much like anybody else. As such they should rewarded for doing good and punished for bad stuff. Remember the wall street bailout? 700 billion and nobody went to jail. Forget jail, nobody got fired. In the world I live in, if a fellow wrecks a truck, he gets fired. In the magical world of the financially elite, drive AIG off a cliff and you get a bail-out. Why do billionaires get bailed out, and we’re told that we can’t afford grannies dentures anymore? Just a thought, why not give tax breaks to job creators that actually create jobs, and tax the living hell out of those that don’t.
Kyle Wingfield
August 5th, 2011
4:37 pm
From 2012-2021, according to CBO’s projections, it’s about one-half of 1 percent of the cumulative GDP for those years. Again, not earth-shattering by any stretch of the imagination.
real john
August 5th, 2011
4:39 pm
Say What?
The $800 billion stimulus is up for grabs as to whether it actually helped or even HURT the economy. The revised GDP numbers how GDP contracted -.03% in 2008. In 2009, the year the stimulus was passed, it contracted -3.5% according to the new figures out so one could argue it may have actually made things worse.
Rafe Hollister
August 5th, 2011
4:39 pm
Kyle, don’t worry about it, Barry said today “everything is going to get better”. I’m convinced, he is always right isn’t he? It is the summer of recovery, right?
.1%(millionaires as percent of total taxpayers) pay 38% of all federal taxes.
$3700 in taxpayer money goes to subsidize every passenger leaving from Ely, NV airport.
Dems/Obama solution to all problems, raise taxes on that .1%, as it is only FAIR.
Toby
August 5th, 2011
4:39 pm
In 82 I opened a restaurant, I never knew we were in a recession. In 82 there was no cable news or blogs,i find that interesting.
Joe the Plutocrat
August 5th, 2011
4:43 pm
John Galt, 10-4; just as the “value” of a paper dollar has lost is now between four and five cents (losing 95% of its buying power). here’ the proverbial $16 trillion question; where’d the 95% go? it didn’t disappear, now did it? what we need to do is find one of ‘em highfalutin computers, find some geek (probably Asian) to write a program and see if the missing 95% of buying power of all the GDP dollars generated between 1919 and 2011 is somewhere in the $14-$16 trillion on our tab?
Joe the Plutocrat
August 5th, 2011
4:48 pm
when it comes to “finance” and “economics” I plead the 5th Dimension, but does anyone remember the pundits and analysts yammering about how the TARP recipients were not going to use the $800 billion to add jobs or invest in IT upgrades; they were going to “stabilize their balance sheets” (pay executive bonuses and just kinda sit on the rest). well that’s where half of the $1.5 trillion American corporations are sitting on is sitting.
MarkV
August 5th, 2011
4:50 pm
Kyle,
I did not write that the cuts were “why everyone suddenly decided the U.S. is on the verge of a double-dip.” In that I agreed with you in your article.
But the economists still believe than ANY cuts hurt the economy in its current state. I think that you are too cavalier in your calculations. “$25 billion — which is about one-sixth of 1 percent of GDP. Not even a rounding error.” I find it amazing how some people are outraged by spending of several millions or hundred of millions, but then dismiss several tens of billions as negligible. Not to mention the fact I asked you about before without getting an answer – who are the people who will NOT get the money, and therefore will NOT spend it?
the original and still the best John Galt
August 5th, 2011
4:59 pm
Joe: Amen, brother, you’re on the right track. It’s more like 200 trillion in reality though. Get ready for a glass of beer to cost 6 billion dollars, just like one cost 6 bllion marks at the height of inflation in the German Weimar Republic days in the 1920’s.
MarxV
August 5th, 2011
5:06 pm
Two nice things to say about economist: First, they are usually wrong in their forecasts or predictions. Secondly, you can usually find one or two, if not a group of them, that will agree with you on just about any issue to your liking.
Paying down debt is a wise move, more spending/deficit spending isn’t.
Lil' Barry Bailout (Revised Downward)
August 5th, 2011
5:06 pm
Capital is on strike in large part because Obozo has created an environment where investors and businesses can’t be sure their investments won’t be confiscated or converted to some government purpose (Chrysler bondholders a prime example).
Your business-bashing Idiot Messiah and his lack of respect for private property is the problem.
Jefferson
August 5th, 2011
5:20 pm
That’s what you say, with a gleam in your eye at that.
yuzeyurbrane
August 5th, 2011
5:38 pm
Oh, Kyle, so you are an expert in economics now? Excuse me but I think Paul Krugman has a few more credentials by his name. Why not just man up? You know the old Potter Barn Rule–if you break it, you own it. You and John Boehner got 98% of what you wanted and now the cold aggregate wisdom of the market has delivered a verdict. Put on your big boy pants.
Hillbilly D
August 5th, 2011
5:51 pm
I don’t claim to be an expert on high finance but it seems to me the problem with the economy is decreased consumer demand. When I was growing up, my grandparents and parents used to tell me about the Great Depression and how they got through it. It was a life altering situation that they never forgot. I think something similar happened with the Great Meltdown. Many people had an epiphany about consumerism and realized they can live without a lot of the things that they thought they couldn’t. I think many people’s outlook has changed for the rest of their lives, just as happened during the Depression. I don’t look for consumer demand to ever get back to previous levels until a generation or two has passed and the lessons of the Meltdown have been forgotten, just as the lessons of the Depression were forgotten.
Rafe Hollister
August 5th, 2011
5:56 pm
Yuzey
NO, we did not get anywhere near what we wanted. S&P and Moody’s wanted 4T in real spending cuts. We got pie in the sky, smoke and mirror spending cuts over 10 years, if they ever happen.
How about returning to 2008 Federal spending levels. Barry has increased spending by 28% since his regime began. Reduce that by 5% each year until we get back to 2008 levels and retire the budget deficit in about 10 years. The Tea Party was unable to get spending cuts that take effect now, so we did not get what we wanted. The Compromise was just something the politicians use to change the subject for a few days.
Kyle Wingfield
August 5th, 2011
5:58 pm
Let’s call it the Yuze Corollary to the Pottery Barn Rule: If you’re in the store when it breaks, you own it.
Rafe Hollister
August 5th, 2011
6:00 pm
Hillbilly
I totally agree, but the only way to increase demand is to return some money to the taxpayers through tax cuts. Maybe a little found money will convince Grandpa to buy Grandma some new threads.
Linda
August 5th, 2011
6:02 pm
The reason that the European countries are in trouble is due to socialism & spending more money than their revenues. Their austerity measures have absolutely nothing to do with the problems that predicated their demise. That’s where the US is headed. The US is in big trouble.
The history that I learned about FDR is different from other bloggers on this post.
I have a degree in economics. The economic principles I learned are very different from other bloggers on this post.
The progressives have been able to skew history & economics, among other subjects. This is the reason that we need to close the natl. Dept. of Education.
I am inclined to side with the credit rating agencies, who have stated that our debt is negative, & with the Defense Dept., who has stated that our debt is the worst threat to our natl. security.
The USA is a republic, not a socialist country. We need to restore America, not transform it.
Lil' Barry Bailout (Revised Downward)
August 5th, 2011
6:09 pm
yuzeyurbrane: Oh, Kyle, so you are an expert in economics now? Excuse me but I think Paul Krugman has a few more credentials by his name.
————————————-
Krugman hasn’t been an economist for a couple of years now. He’s a full-time Obozo receptacle.
MarkV
August 5th, 2011
6:18 pm
There are five socialist countries in the world at this time. All of them are republics.
Lil' Barry Bailout (Revised Downward)
August 5th, 2011
6:21 pm
Obozo has lots of folks with “credentials” working in his regime. How’s that working out?
yuzeyurbrane
August 5th, 2011
6:30 pm
If we all weren’t in danger of going down the economic toilet because of these ideological fantasies that you try to pass as facts, I would get a little pleasure out of Kyle starting to try to rationalize the cold hard impartial verdict of the market.
Lil' Barry Bailout (Revised Downward)
August 5th, 2011
6:31 pm
“All of them are republics”
——————
…and two of them have the temerity to call themselves “Democratic”.
Lil' Barry Bailout (Revised Downward)
August 5th, 2011
6:38 pm
yuzeyurbrane: If we all weren’t in danger of going down the economic toilet because of these ideological fantasies that you try to pass as facts blah blah
——————————–
We aren’t in danger from a newspaper columnist’s opinions. We’re in danger from our current economic, fiscal, and regulatory policies. Won’t all those highly credentialed experts in your Idiot Messiah’s administration be so proud to have been present at the downgrade?
Linda
August 5th, 2011
7:03 pm
Republic countries, such as the US, who have a progressive/socialist president & a majority in the left wing party, who demand more spending to advance their agenda, want to bring down their respective countries to their knees. It’s happening in Europe & is happening in the US right before our eyes.
I Report (-: You Whine )-: Thee Magnificent!!! mmm, mmmm, mmmmm! Just sayin...
August 5th, 2011
8:47 pm
S&P downgrades U.S. credit rating for first time
Wow, isn’t obozo just the greatest?
Lil' Barry Bailout (Revised Downward)
August 5th, 2011
9:29 pm
IMHO, Obama’s incompetent performance, resulting in America losing its AAA credit rating, is damn close to grounds for impeachment.
You've been schooled again Kyle
August 6th, 2011
5:21 am
Kyle
Stick your conservative head in the sand all you want but history has proven that a recession is not the time for austerity.
You've been schooled again Kyle
August 6th, 2011
5:27 am
Linda – do you even pay attention to what is going on in Europe? European countries haven’t been spending more, they’ve been spending less. That’s what has exacerbated the downturn and killed economic growth all across Europe. Turn off fox news and read.
Pottery Barn Rule
August 6th, 2011
7:52 am
I’m curious of the Pottery Barn rule applies to airplanes crashing into the twin towers?
No standards, and poor reasoning, in U.S. downgrade | Kyle Wingfield
August 8th, 2011
5:02 am
[...] the really big losses didn’t come until afterward (when there just happened to be a lot of other unpleasantness going on elsewhere in the [...]